System and method for creating and trading a derivative investment instrument over a range of index values

• US 8,719,145 B2
• Filed: 03/16/2012
• Issued: 05/06/2014
• Est. Priority Date: 09/04/2007
• Status: Active Grant

• Current Assignee: Cboe Exchange, Inc. (Cboe Global Markets, Inc.), Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Inventors: O'Connell, Marty, Hiatt, John Jr., Speth, William
• Primary Examiner(s): Shafi, Muhammad
• Assistant Examiner(s): Malhotra, Sanjeev
• Application Number:
  US13/422,536
• Publication Number:
  US 20120323755A1
• Time in Patent Office: 781 Days
• Field of Search: 705/35, 705/36, 705/36.R, 705/37, 385/128
• US Class Current: 705/37
• CPC Class Codes: G06Q 20/10 specially adapted for electronic funds transfer [EFT] systems; specially adapted for home banking systems
• CPC Class Codes: G06Q 30/0611 Request for offers or quotes
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/08 Insurance
• CPC Class Codes: G06Q 40/12 Accounting
• CPC Class Codes: G06Q 40/123 Tax preparation or submission

Abstract

An investment instrument based on a range of index values is disclosed that allows investors to take risk positions relative to the size, or length, of the range. The investment instrument has a monetary value that increases as the index value increases within a low range interval of the range, decreases as the index value increases within a high range interval of the range, and is fixed or capped if the index value falls within a middle range interval of the range. Typically, one settlement amount will be zero and the other will be an amount greater than the investment instrument price.

Claims

1. An exchange system configured for trading a derivative investment instrument, the exchange system comprising:

an interface for receiving an incoming order to purchase the derivative investment instrument, the derivative investment instrument having a fixed length payout range associated therewith, wherein the fixed length payout range comprises a plurality of values of a variable for which the derivative investment instrument pays a positive amount if a settlement value of the variable falls within the fixed length payout range at expiration of the derivative investment instrument;

a book memory configured to store a plurality of previously received orders, the plurality of previously received orders each having the fixed length payout range associated therewith;

a system memory configured to store predefined condition parameters for a plurality of potential outcomes for the derivative investment instrument; and

a processor adapted to;

associate the plurality of previously received orders in the book memory with at least one of the predefined condition parameters, wherein the predefined condition parameters include at least one parameter for identifying an occurrence of at least one variable value falling within the fixed length payout range before an expiration of the derivative investment instrument; and

calculate a zero payout value for orders having the at least one variable value that did not fall within the fixed length payout range before the expiration of the derivative investment instrument and a greater than zero payout value for orders having at least one variable value that did fall within the fixed length payout range prior to or at the expiration of the derivative investment instrument.

2. The exchange system of claim 1, wherein the system memory further comprises allocating parameters for allocating orders among market participants.

3. The exchange system of claim 2, wherein the processor is further configured to allocate the previously received orders based on the allocating parameters in the system memory and wherein the allocating parameters include parameters for allocating preferentially against orders with larger size.

4. The exchange system of claim 3 wherein the derivative investment instrument comprises an option contract.

5. The exchange system of claim 3, wherein the derivative investment instrument comprises a futures contract.

6. The exchange system of claim 3, further comprising a clearing system in communication with the processor, the clearing system adapted to settle the derivative instrument.

7. The exchange system of claim 1, wherein the variable comprises an underlying asset.

8. The exchange system of claim 1, wherein the variable comprises an underlying commodity.

9. The exchange system of claim 1, wherein the variable comprises an underlying market indicator.

10. The exchange system of claim 1, wherein the fixed length payout range comprises a plurality of segments, wherein:

in a first segment of the fixed length payout range the processor is configured to calculate a payout amount for the derivative investment instrument that increases as a value of the variable increases;

in a second segment of the fixed length payout range the processor is configured to calculate a payout amount for the derivative investment instrument that decreases as the value of the variable increases; and

in a third segment of the fixed length payout range the processor is configured to calculate a fixed payout amount for the derivative investment instrument.

11. The exchange system of claim 10, wherein the third segment comprises a third set of values of the variable that is between a first set of values of the variable associated with the first segment and a second set of values of the variable associated with the second segment.

12. The exchange system of claim 1, wherein the variable comprises an index.

13. A method for trading a derivative investment instrument, the method comprising:

in an exchange system having an interface for receiving an incoming order to purchase the derivative investment instrument, the derivative investment instrument having a fixed length payout range associated therewith, wherein the fixed length payout range comprises a plurality of values of a variable for which the derivative investment instrument pays a positive amount if a settlement value of the variable falls within the fixed length payout range at expiration of the derivative investment instrument, a book memory for storing a plurality of previously received orders, a system memory for storing predefined condition parameters for a plurality potential outcomes for the derivative investment instrument, and a processor, the processor;

associating the plurality of previously received orders in the book memory with at least one of the predefined condition parameters, wherein the predefined condition parameters include at least one parameter for identifying an occurrence of at least one variable value falling within the fixed length payout range before an expiration of the derivative investment instrument;

calculating a zero payout value for orders having the at least one variable value that did not fall within the fixed length payout range before the expiration of the derivative investment instrument;

calculating a greater than zero payout value for orders having at least one variable value that did fall within the fixed length payout range prior to or at the expiration of the derivative investment instrument.

14. The method of claim 13, wherein the fixed length payout range comprises a plurality of segments, and further comprising the processor:

calculating a payout amount for the derivative investment instrument that increases as a value of the variable increases in a first segment of the fixed length payout range;

calculating a payout amount for the derivative investment instrument that decreases as the value of the variable increases in a second segment of the fixed length payout range; and

calculating a fixed payout amount for the derivative investment instrument when the value of the variable is in a third segment of the fixed length payout range.

15. The method of claim 14, wherein the variable comprises an underlying asset.

16. The method of claim 14, wherein the variable comprises an underlying commodity.

17. The method of claim 14, wherein the variable comprises an underlying market indicator.

18. The method of claim 14, further comprising transmitting transaction data relating to the derivative investment instruments to market data vendors or market participants over a network.

19. The method of claim 13, wherein the variable comprises an index.